I have not seen the show. But what you're describing does not to my mind make the use of live musicians, should that happen, sound like it would be a problem. The setup is explicit, as you describe it. The audience can suspend disbelief easily enough. And if the creative team is super-concerned that the presence of a visible live orchestra would so upset or confuse the audience as to create a violation of the show's setup, put them upstage or in a room somewhere. Or just cover the pit.
Honestly, I think the advantages of a live orchestra in any live performance of a musical would outweigh what seems to me a questionable artistic choice even given the show's setup regarding karaoke.